Chapter 8 Receivables, Bad Debt Expense, Interest Revenue PDF

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Notes taken from the Introduction to Financial Accounting textbook at the University of Iowa in 2018....

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❖ VFC allows business customers to open an account to buy items on credit, but not individual customers ❖ Disadvantages of extending credit ➢ 1. Increased wage costs: VFC will have to hire more people to evaluate whether each customer is creditworthy, track how much a customer owes, follow up to collect the receivable from each customer ➢ 2. Bad debt costs: customer has financial difficulties or doesn’t pay in full ➢ 3. Delayed receipt of cash: may have to take out a loan b/c payment is not received on time ❖ Note receivable: a promise that requires another party to pay the business according to a written agreement ➢ 1. Company loans money to employees for businesses ➢ 2. Company sells expensive items for which customers require an extended payment period ➢ 3. Company converts an existing account receivable to a note receivable to allow an extended payment period ❖ Accounts receivable: amounts owed to a business by its customers ➢ 1. Report A/R at the amount the company expects to collect ➢ 2. Match the cost of bad debts to the accounting period in which the related credit sales are made ❖ Record bad debts in the same period as the sale ❖ Allowance method: a method of accounting that reduces account receivable (as well as net income) for an estimate of uncollectible amounts (bad debts) ➢ 1. Make an end-of-period adjustment to record estimated bad debts in the period credits sales occur ➢ 2. Remove (write off) specific customer balances when they are known to be uncollectible ❖ Bad debt expense: reports the estimated amount of this period’s credit sales that customers will fail to pay ❖ Credit sales affect both income statement and balance sheet ➢ Debit to bad debt expense ➢ Credit to allowance for doubtful accounts ❖ Write-off: the act of removing an uncollectible account and its corresponding allowance from the accounting records ❖ Subsidiary account: VFC internally keeps separate accounts receivable accounts called this for each customer ❖ Write off an account receivable ➢ Debit allowance for doubtful accounts ➢ Credit accounts receivable ➢ Does not affect income statement ❖ Percentage of credit sales method: (income statement approach) estimates bad debts based on the historical percentage of sales that lead to bad debt losses ➢ Credit sales this month x bad debt loss rate x bad debt expense this month ❖ Aging of accounts receivable method: (balance sheet approach) estimates uncollectible accounts based on the age of each account receivable

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➢ 1. Prepare an aged listing of accounts receivable ➢ 2. Estimate bad debt loss percentages for each category ➢ 3. Compute the total estimate by multiplying the totals in step 1 by the percentages in step 2 and then summing across all categories Account recoveries (allowance method) ➢ When a customer pays an account balance that was previously written off ➢ Debit to accounts receivable ➢ Credit to allowance for doubtful accounts ➢ Debit to cash ➢ credit to accounts receivable Direct write off method: records bad debt expense only when a company writes off specific amounts Interest formula: I=PRT Receivables turnover: net sales revenue/average net receivables Days to collect: 365/receivables turnover...